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on Open MacroEconomics |
| By: | Michael Bleaney; F. Gulcin Ozkan |
| Abstract: | This paper explores the relationship between the denomination of public debt and the choice of exchange rate regime. Unlike indexed domestic debt, foreign debt is subject to valuation effects from real exchange rate shocks. In a standard set-up, where a peg functions only as a nominal anchor, more foreign debt makes pegging less attractive, because it increases the value of a fexible exchange rate as a shock absorber. This result can be reversed if we incorporate the stylized fact that pegs have lower real exchange rate volatility, and if external shocks are sufficiently large relative to domestic shocks. |
| Keywords: | inflation, output, public debt and exchange rate regimes. |
| JEL: | F33 H63 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:08/10&r=opm |
| By: | Bernardo Guimaraes |
| Abstract: | This paper analyses whether sovereign default episodes can be seen as contingencies ofoptimal international lending contracts. The model considers a small open economy withcapital accumulation and without commitment to repay debt. Taking first orderapproximations of Bellman equations, I derive analytical expressions for the equilibriumlevel of debt and the optimal debt contract. In this environment, debt relief generated byreasonable fluctuations in productivity is an order of magnitude below that generated byshocks to world interest rates. Debt relief prescribed by the model following the interest ratehikes of 1980-81 accounts for a substantial part of the debt forgiveness obtained by the mainLatin American countries through the Brady agreements. |
| Keywords: | sovereign debt, default, capital flows, optimal contract, world interest rates |
| JEL: | F3 F4 G1 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0847&r=opm |
| By: | Raquel Fonseca; Lise Patureau |
| Abstract: | This paper investigates the sources of business cycle comovement within the New Open Economy Macroeconomy framework. It sheds new light on the business cycle comovement issue by examining the role of cross-country divergence in labor market institutions. The authors first document stylized facts supporting that heterogeneous labor market institutions are associated with lower cross-country GDP correlations among OECD countries. They then investigate this fact within a two-country dynamic general equilibrium model with frictions on the good and labor markets. On the good-market side, they model monopolistic competition and nominal price rigidity. Labor market frictions are introduced through a matching function ˆ la Mortensen and Pissarides (1999). Their conclusions disclose that heterogenous labor market institutions amplify the crosscountry GDP differential in response to aggregate shocks. In quantitative terms, they contribute to reduce cross-country output correlation, when the model is subject to real and/or monetary shocks. Their overall results show that taking into account labor market heterogeneity improves their understanding of the quantity puzzle. |
| Keywords: | International business cycle, labor market institutions, wage bargaining |
| JEL: | E24 E32 F41 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:ran:wpaper:562&r=opm |
| By: | THORBECKE, Willem |
| Abstract: | East Asia is characterized by intricate production and distribution networks that allow fragmented production blocks to be allocated across countries based on comparative advantage. These networks have produced enormous efficiency gains. Exchange rate volatility, by increasing uncertainty, may reduce the locational benefits of cross-border fragmentation. This paper presents evidence that exchange rate volatility decreases the flow of electronic components within East Asia. Electronic components is by far the largest category of intermediate goods traded within these networks. These results imply that policy makers should consider how to maintain stable exchange rates in the region in order to provide a steady backdrop for East Asian production networks. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:08016&r=opm |
| By: | Alejandro Cuñat; Szabolcs Deak; Marco Maffezzoli |
| Abstract: | A reduction in income tax rates generates substantial dynamic responses within the framework of the standard neoclassical growth model. The short-run revenue loss after an income tax cut is partly - or, depending on parameter values, even completely - offset by growth in the long-run, due to the resulting incentives to further accumulate capital. We study how the dynamic response of government revenue to a tax cut changes if we allow a Ramsey economy to engage in international trade: the open economy's ability to reallocate resources between labor-intensive and capital-intensive industries reduces the negative effect of factor accumulation on factor returns, thus encouraging the economy to accumulate more than it would do under autarky. We explore the quantitative implications of this intuition for the US in terms of two issues recently treated in the literature: dynamic scoring and the Laffer curve. Our results demonstrate the internaional trade enhances the response of government revenue to tax cuts by a relevant amount. In our benchmark calibration, a reduction in the capital-income tax rate has virtually no effect on government revenue in steady state. |
| Keywords: | international trade, Heckscher-Ohlin, dynamic macroeconomics, taxation, revenue estimation, Laffer curve |
| JEL: | E13 E60 F11 F43 H20 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0860&r=opm |
| By: | Jorge Carrera (Banco Central de la Republica Argentina, Buenos Aires and Universidad Nacional de La Plata); Romain Restout (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France) |
| Abstract: | This paper investigates the long run behavior of real exchange rates in nineteen countries of Latin America over the period 1970 - 2006. Our data does not support the Purchasing Power Parity (PPP) hypothesis, implying that real shocks tend to have permanent effects on Latin America’s real exchange rates. By exploiting the advantage of non stationary panel econometrics, we are able to determinate factors that drive real exchanges rate in the long run : the Balassa-Samuelson effect, government spending, the terms of trade, the openness degree, foreign capital flows and the de facto nominal exchange regime. The latter effect has policy implications since we find that a fixed regime tends to appreciate the real exchange rate. This finding shows the non neutrality of exchange rate regime regarding its effects on real exchange rates. We also run estimations for country subgroups (South America versus Caribbean and Central America). Regional results highlight that several real exchange rates determinants are specific to one geographic zone. Finally, we compute equilibrium real exchange rate estimations. Two main results are derived from the investigation of misalignments, [i ] eight real exchange rates are quite close to their equilibrium level in 2006, and [ii ] our model shows that a part of currencies crises that arose in Latin America was preceded by a real exchange rate overvaluation. |
| Keywords: | equilibrium real exchange rate, panel cointegration, panel unit roots |
| JEL: | C23 F31 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:0811&r=opm |
| By: | Auer, Raphael (Swiss National Bank); Chaney, Thomas (Department of Economics University of Chicago) |
| Abstract: | This paper builds up an extension to the Mussa and Rosen (1978) model of quality pricing under perfect competition. Our model incorporates decreasing returns to scale. First, we predict that exchange rate shocks are imperfectly passed through into prices. Second, prices of low quality goods are more sensitive to exchange rate shocks than prices of high quality goods. Third, in response to an exchange rate appreciation, the composition of exports shifts towards higher quality and more expensive goods. We test those predictions using highly disaggregated price and quantity US import data. We find that the prices of high quality goods, proxied as high unit price goods, are more sensitive to exchange rate movements. Moreover, we find evidence that in response to an exchange rate appreciation, the composition of exports shifts towards high unit price goods. |
| Keywords: | Pricing-to-Market; Exchange Rate Pass Through; Local Distribution |
| JEL: | F11 F31 F41 |
| Date: | 2008–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:ris:snbwpa:2008_006&r=opm |
| By: | Marco Del Negro; Christopher Otrok |
| Abstract: | We develop a dynamic factor model with time-varying factor loadings and stochastic volatility in both the latent factors and idiosyncratic components. We employ this new measurement tool to study the evolution of international business cycles in the post-Bretton Woods period, using a panel of output growth rates for nineteen countries. We find 1) statistical evidence of a decline in volatility for most countries, with the timing, magnitude, and source (international or domestic) of the decline differing across countries; 2) some evidence of a decline in business cycle synchronization for Group of Seven (G-7) countries, but otherwise no evidence of changes in synchronization for the sample countries, including European and euro-area countries; and 3) convergence in the volatility of business cycles across countries. |
| Keywords: | Time-series analysis ; International economic integration ; Business cycles ; Group of Seven countries |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:326&r=opm |
| By: | Jean-Pierre Allégret (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France); Alain Sand-Zantman (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France) |
| Abstract: | This paper analyses the monetary consequences of the Latin-American trade integration process. We consider a sample of five countries –Argentina, Brazil, Chile, Mexico and Uruguay- spanning the period 1991-2007. The main question raised pertains to the feasibility of a monetary union between L.A. economies. To this end, we study whether this set of countries is characterized by business cycle synchronization with the occurrence of common shocks, a strong similarity in the adjustment process and the convergence of policy responses. We focus especially our attention on two points. First, we try to determine to what extent international disturbances influence the domestic business cycles through trade and/or financial channels. Second, we analyze the impact of the adoption of different exchange rate regimes on the countries’ responses to shocks. All these features are the main issues in the literature relative to regional integration and OCA process. |
| Keywords: | bayesian VAR, business cycles, Latin American countries, optimum currency area |
| JEL: | C32 E32 F42 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:0809&r=opm |
| By: | Mehrotra, Aaron (BOFIT); Kozluk , Tomasz (BOFIT) |
| Abstract: | We study the effects of Chinese monetary policy shocks on China’s major trading partners in East Asia by estimating structural vector autoregressive (SVAR) models for six economies in the region. We find that a monetary expansion in Mainland China leads to an increase in real GDP (temporary) and the price level (permanent) in a number of economies in our sample, most notably in Hong Kong and the Philippines. The impact could result from intertemporal substitution present in a general equilibrium framework which allows for positive domestic impacts of foreign monetary expansions. Our results emphasize the growing importance of China for its neighboring economies and the significance of Chinese shocks for the design of monetary policy in Asian economies. |
| Keywords: | monetary policy shocks; Asian production chain; SVAR; East Asia; China |
| JEL: | E52 F42 |
| Date: | 2008–06–03 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2008_005&r=opm |
| By: | Neil Dias Karunaratne (School of Economics, The University of Queensland) |
| Abstract: | In this paper the polemics and empirics on the sustainability of Australia’s high current account deficits and foreign debt that prevailed during the period 1959q3-2007q1 is revisited. The paper contends that the forces of globalization brought about a policy regime shift culminating in the floating of the Australian dollar in 1983q4. However, the policymakers failed to abandon the static old paradigm, the Keynesian-Mundell-Fleming model, which had been rendered obsolete by the policy regime shift. The policymakers continued to distill their activist policies to reduce the high current account deficits from an outmoded paradigm. The proponents of the rival new paradigm argued that the current account imbalances were the residual outcome of rational optimizing decisions of private sector agents and therefore the use of activist policies to target the reduction of the current account deficits as proposed by the adherents of the old paradigm were misconceived. The ensuing clash between the proponents of rival paradigms fuelled the policy polemics during almost a decade after the paradigm shift that occurred at the same time as the floating of the exchange rate. The activist policies failed to halt the rise in the current account deficits and foreign debt and the predicted dire economic consequences from the failure to rein in the current account deficit never materialized. Today, the current deficits and the foreign debt are at record high levels by historical standards, but they do not seem to grab the attention of the policymakers or make media headlines as in the past. The empirical results offer qualified support for prevalence of consumption smoothing during both the pre and post-float periods. The finding in favour of consumption-smoothing during the pre-float era is at odds with the findings of other studies. There appears to be evidence supporting the hypothesis that a regime-shift due to globalization and it occurred at the same time as the float and was reflected in an increase in consumption-tilting. Post-float and during the entire study period Australia, appears to have satisfied the intertemporal budget constraint and remained solvent. Furthermore, both over the whole sample period and post float period Australia appears to have engaged in effective consumption-smoothing notwithstanding the polemics and some empirics to the contrary. The solvency and consumption smoothing dynamics observed for Australia during the study period supports the new paradigm’s non-activist policy stance towards high current account deficits. However, it should be noted that this passive policy stance that is intertemporally optimal for achieving current account sustainability in Australia may not be applicable in other countries with high current account deficits because they may idiosyncratic features that differ widely from those prevalent in Australia. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:qld:uq2004:364&r=opm |
| By: | Sebastian Edwards |
| Abstract: | In this paper I analyze the role of openness and globalization in Latin America's economic development. The paper is divided into two distinct part: I first (Sections II through IV) provide an analysis of 60 years of the region's economic history, that go form the launching of the Alliance for Progress by the Kennedy Administration in 1961, to the formulation and implementation of the market-oriented reforms of the Washington Consensus in the 1990s and 2000s. I conclude that Latin America's history has been characterized by low growth, high inflation and recurrent external crises. In Section V I deal formally with the costs of crises, and I estimate a number of variance component models of the dynamics of growth. I find that external crises have been more costly in Latin America than in the rest of the world. I also find that the cost of external crises has been inversely related to the degree of openness. |
| JEL: | F21 F30 F32 N26 O40 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14034&r=opm |
| By: | Abhijit Sen Gupta (Indian Council for Research on International Economic Rela); Amitendu Palit (Indian Council for Research on International Economic Rela) |
| Abstract: | In this paper we evaluate the feasibility of a common Asian Currency Unit (ACU) involving countries of East and South Asia. We analyze the various properties of an ACU and calculate it's value using weighted averages of the values of Asian currencies. Looking at the movement of individual Asian currencies vis-'a-vis the ACU, we find that there have been severe misalignments among the Asian currencies during the past seven years. We discuss the possibility of the Rupee figuring in the ACU and identify the major economic, political and historical impediments in the way of faster acceptance of ACU in the region. We point out the various strategies that could be employed to facilitate faster adoption of ACU. These include creating certain institutional safeguards as well as strengthening the existing ones. Finally, we highlight some ways to promote the use and acceptability of the ACU and also emphasize the importance of conceiving a larger framework of participating countries, including India. |
| Keywords: | Asian Currency Unit, Regional integration, Monetary cooperation |
| JEL: | F36 F41 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ind:icrier:208&r=opm |